A solid business budget is only as effective as the manager who implements it. Many believe the key to getting the most out of a budget is simply to ensure you never spend more for any line item than is allocated but sticking to the plan is really only half the battle.
A budget, like your business plan, is a living document. What works today may not work tomorrow.
An effective budget is one that is reassessed and revised over time. Here’s a simple guide to ensuring your revisions bring about a positive effect on your company’s bottom line.
Schedule a Monthly Review
Setting up your budget for monthly analysis safeguards your business against spending too much or too little in any given department or activity.
Ask your accounting department to prepare a short report each month listing all expenditures where actual dollars spent varied wildly from the proposed allotment. Use this list to identify opportunities and threats in spending habits.
What to do When You’re Spending too Little
There are three basic reasons which explain under-spending on any particular category in your budget:
1. You miscalculated how much money would be required to complete the task. If current spending levels are producing the desired output, take these financial savings and move the money into a different project.
2. You need to ramp up spending to avoid future problems. Here are a few situations where a lack of spending may not be a good sign: R&D, sales, marketing, and maintenance. You won’t be helping your business in the long run by not investing in your future today.
3. Future expenditures are coming which will average out the numbers over the year. The one caveat of monthly budget tracking is that certain expenditures don’t take place every month. For example, large equipment or inventory purchases need to be averaged out over time to determine if spending levels are appropriate.
What to do When You’re Spending too Much
Similarly, instances where your company is overspending need to be quickly analysed to determine whether the additional expenditures are warranted or superfluous.
When additional spending is deemed to be necessary be sure to adjust your future budget to reflect this change. Do your best to “find” the money elsewhere as opposed to simply taking a hit to your profit.
When extra costs are unjustified you must rectify the situation as soon as possible and scale back future waste immediately.
Budget Shifting is a Game of Guess and Check
It’s important to remember that your business plan and budget are nothing more than educated assumptions. To truly determine how dollars spent translate into revenue and profits you must try new things and monitor the results.
Don’t speculate on the effect injecting $X into marketing will have on sales. Make changes to your budget and then wait to see what impact the changes bring.
Every month and particularly every year the smart business owner is tracking the real effects of changes in spending habits and using this information to make intelligent decisions on future strategies.
Respond Quickly to Unexpected Changes
In today’s fast-paced marketplace an enterprise needs to adapt quickly. With a million and one unpredictable shifts lurking right around the corner it’s important to leave a little wiggle room in your budget for last minute revisions.
From losing/gaining a huge client to a supplier going out of business or a sharp swing in the local economy affecting sales, your budget must be flexible enough to adjust on a moment’s notice.
Rein in Your Receivables
Your monthly budget analysis is the ideal time to gauge the effectiveness of your ability to collect on invoices.
If you’re paying the bills on time but can’t convince your customers to do the same you’re soon going to run into serious cash flow issues. Speeding up your invoice and collection process is a simple budget adjustment that is sure to reap quick rewards.
Seek out Professional Help when Necessary
Not all budgetary issues are easy to detect or rectify. At Budget One we help SME owners fill in the gaps with specialist knowledge in business planning.
For assistance with your business budget, call us on 0429 142 413.
Author, Taso Tounis
Taso Tounis is a business planning and budgeting consultant. He is passionate about helping business owners, organisations’ leaders and managers achieve better financial results, through insightful reporting. Learn more about Taso.
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